Life insurers sue B-Ds over third-party VA sales

They allege a scheme in which investors bet on the lives of terminally ill annuitants

Feb 21, 2010 @ 12:01 am

By Darla Mercado

Two life insurers are suing a trio of broker-dealers, accusing them of fraudulently selling to third parties variable annuities with lucrative death benefits on terminally ill individuals. The broker-dealers, LifeMark Securities Corp., Fortune Financial Services Inc. and The Leaders Group Inc., are accused of fraud, unjust enrichment and negligence for processing variable annuities that investors purchased on behalf of the ailing individuals, according to suits filed by Transamerica Life Insurance Co. and Western Reserve Life Assurance Company of Ohio. In their suits, the insurers claim that they were misled by the broker-dealers and their registered reps about the relationship between investors and annuitants, that the brokerage firms and reps failed to disclose the annuitants' terminal illnesses and that the firms violated contractual obligations to train and supervise their reps. The broker-dealers dispute the insurance companies' charges and have filed a motion to dismiss the lawsuits, asserting that they had no duty to tell the insurers that the annuitants were terminally ill. A hearing is scheduled for March 15 in U.S. District Court in Providence, R.I., regarding the broker-dealers' motion to dismiss the case. The insurers' suits also allege that Joseph A. Caramadre, an attorney in Cranston, R.I., masterminded the scheme, in which he allegedly solicited terminally ill people through ads, offering them $2,000 so that investors, whom the attorney also allegedly solicited, could purchase a variable annuity with a death benefit rider on the annuitant. News about him was first reported in The Wall Street Journal. According to the claim, investors were told that they would at the very least have their premiums returned but could also receive substantial returns from enhanced death benefits. “The basic problem with the claims is that they're based on the false premise that there's some insurable-interest requirement that applies to variable annuities and some requirement to disclose the health of the person chosen to be an annuitant,” said Robert G. Flanders Jr., a partner at Hinckley Allen & Snyder LLP, who represents Mr. Caramadre and his firm, Estate Planning Resources Inc. “This is a conscious decision that the insurers made to distinguish this product from life insurance by opting not to vet the health of the annuitant, or require that there be some relationship between the annuitant and the owner, investor or beneficiary,” he said. Jane Riley, compliance officer for The Leaders Group, declined to comment on the case, as did Peter Blume, a partner at Thorp Reed & Armstrong LLP, who represents Fortune Financial. Joseph Cavanagh of Blish & Cavanagh LLP, attorney for LifeMark, did not return calls. Despite the broker-dealers' claims that they have no contractual obligation to verify the health of the annuitant or the relationship between the annuitant and the owner or beneficiary, the transactions probably should have raised a few red flags, compliance attorneys said.

“If you're not meeting with the insured, but rather with a designated beneficiary, then that should raise questions,” said Clifford E. Kirsch, a partner at Sutherland Asbill & Brennan LLP, who added that broker-dealers ought to make their reps question how the variable annuities being sold are used.

Even if the annuitant isn't the party funding the annuity, suitability standards apply, and reps must know why the infirm person is buying the annuity, and how the death benefit and other product features relate, he said.

Further, a suitability check should get to the heart of where the premium dollars are coming from.

“Premium financing through another party raises issues on the source of funds and the question of why the person is buying the annuity in the first place,” Mr. Kirsch said.

A lack of an immediately discernible relationship between the annuitant and the owner should set off suspicions at the broker-dealer, said Amy Lynch, founder and president of FrontLine Compliance LLC.

“You think firms would catch a suspicious relationship,” she said. “If you have a rep who's suddenly selling annuities, go back and look at the contracts and applications to see if the relationships make sense.”

Mr. Flanders noted that while the insurers' complaints indicate that the annuitants are the ones who signed the annuity applications, the investors are the ones who supplied the checks and applied for the annuities.

“The annuitant has no other rights than agreeing to serve as a measuring life,” Mr. Flanders said. “The duty of the broker or the rep runs only to the investor or owner of the annuity; there is no obligation to meet the annuitant, much less vet them for anything at all.”

Other broker-dealers said they have processes in place to catch questionable variable annuity activity.

“We do not approve such transactions, and our advisers do not participate in such transactions,” said Paul Tolley, chief compliance officer at Commonwealth Financial Network.

But others said they aren't completely sure of the soundness of their safeguards.

One executive at a major broker-dealer said that while his firm probably is not involved in selling VAs to third-party investors, the firm isn't currently screening for it.

“If we get a new set of rules and procedures, you could just stick a stake into the heart of the product,” said the executive, who asked not to be identified.

E-mail Darla Mercado at


What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Upcoming Event

Jul 10


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


Behind the scenes at Pershing Insite 2018

What goes on behind the scenes at one of the industry's biggest conferences? Join us for an all-access sneak peek!

Latest news & opinion

Mutual funds feel the pinch of platform fees

No-transaction-fee options are a big hit with investors, but funds wind up paying the costs — and passing them on.

Divorce reduces retirement readiness

The new tax law could increase financial challenges for divorced people, but planning opportunities abound.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.

Small broker-dealers seek legislative relief from annual audits

Bills introduced in House, Senate would remove PCAOB requirement.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print